The charts above, courtesy of Ron Griess of the Chart Store, are something that should give investors and traders pause.

The first chart shows the decreasing impact of each Federal Reserve liquidity injection into the open and hungry veins of the market. It should be of concern to investors. Every subsequent hit of that sweet, sweet junk yields a less intense high.

The second chart shows that the uptrend that began Q4 is broken; rally attempts failed pretty much where you would expect them to. Any further weakness (under the cover of EU worries or Debt ceiling shenanigans or other rationalizations) could lead to a move back down to that December low of 1202 or the October low 1074.

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

12 Responses to “The Decreasing Impact of QEs / Twists”

John Hussman talked about this very point in his weekly letter. He even points to two separate Fed studies casting doubts on the effectiveness of quantitative easing other than some limited benefits with regards to mortgage refinancing . And this past week we saw Anna Schwartz pass away who just a few years ago wrote an op-ed editorial arguing against Bernanke’s reappointment due in part on his stance re q.e.

It’s fascinating that there was a time early on in the crisis when the market was despondent over the fact that central banks had already lowered interest rates to the zero bound and were in fact out of ammunition.

Soon thereafter, market participants changed their perspective and decided that the Fed had unlimited ammunition in the form of QE, and would be there to prop the markets ad infinitum with no negative consequences whatsoever. Everybody would get a pony and a pot of gold at the end of the permanent Fed Rainbow, and indeed for a time everyone who speculated did.

Who knows if/when reality returns. Charts such as this may suggest it’s already happening.

QE1 was huge: 1.15T of new money supply
“To provide greater support to mortgage lending and housing markets, the Committee decided today to increase the size of the Federal Reserve’s balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion. Moreover, to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months.”

QE2 was less huge: 600B of new money supply
“the Committee intends to purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month.”

Op Twist was even less huge: 400B to flatten the yield curve, but no new money supply.
“The Committee intends to purchase, by the end of June 2012, $400 billion of Treasury securities with remaining maturities of 6 years to 30 years and to sell an equal amount of Treasury securities with remaining maturities of 3 years or less.”

Makes sense the markets are reacting less vigorously to less vigorous interventions. Not sure this proves QE isn’t working in fact it more likely proves the opposite.

All QE whatever does is put an artificial floor under the market just as the banks are supported by the implied (or real) Bernanke put with taxpayer real backing. It is just too bad that even people not dependent on Wall Street financials are sucked into the belief that Bernanke should be out and walking the streets instead of doing time in Leavenworth.

I agree with Jimmy Dean. It shows that the actions taken by the Fed are less and less powerful due to constraints imposed via politics and some self imposed limits, cost/benefit analysis. If they went ahead and created trillions of new money there’s no question the stock market would rocket – if nothing else due to currency debasement in the unit of value for the market.

[...] policy is becoming less effective and more monetary stimulus could cause more harm than good. A group of charts were published on The Big Picture blog showing how monetary stimulus has become less effective in hte investment [...]

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About Barry Ritholtz

Ritholtz has been observing capital markets with a critical eye for 20 years. With a background in math & sciences and a law school degree, he is not your typical Wall St. persona. He left Law for Finance, working as a trader, researcher and strategist before graduating to asset managementRead More...

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"The largest Asian central banks have gone on record that they are curbing their purchases of US debt. And they are also diversifying their huge reserves, steadily moving away from the dollar. The risks have simply become too many and too serious." -W. Joseph StroupeEditor, Global Events

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